NextEra Energy: Renewable Energy And Good Dividend Growth

Oct.26.11 | About: NextEra Energy, (NEE)

NextEra Energy, Inc. (NYSE:NEE) is a vertically integrated electric utility that operates in the U.S. and Canada. NEE owns about 43 GW of generating capacity. It is also involved in significant wind and solar development. NEE primarily serves customers in Florida. NEE was formerly known as FPL Group Inc., but changed its name in 2010. Fortune ranked NEE as No. 1 among electric and gas utilities in its World's Most Admired Companies list in 2009, 2010 and 2011. However, in 2011, it was tied with The Southern Companies (NYSE:SO).

NEE had about $15.3 billion in revenue in 2010. NEE has a market capitalization of $23.3 billion and an enterprise value of $44.9 billion, suggesting significant leverage. NEE has a strong track record of paying dividends. For 2010, its payout ratio to net income was 42% and its payout to operating cash flow was just 21%. However, when comparing to operating cash flow less capital expenditures it is 71%. While there is still room to raise the dividend, it has to be balanced against growing the overall business.

NEE's estimated forward dividend yield is 4.1% based upon a closing price of $55.20 and the author's projected annual dividend of $2.29. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 8/24/2012 0.580 5.5%
Projected 6/1/2012 0.580 5.5%
Projected 3/2/2012 0.580 5.5%
Projected 11/23/2011 0.550 10.0%
Historical 8/24/2011 0.550 10.0%
Historical 6/1/2011 0.550 10.0%
Historical 3/2/2011 0.550 10.0%
Historical 11/23/2010 0.500 5.7%
Historical 8/25/2010 0.500 5.7%
Historical 6/2/2010 0.500 5.7%
Historical 2/24/2010 0.500 5.7%
Historical 11/24/2009 0.473 6.3%
Historical 8/26/2009 0.473 6.3%
Historical 6/3/2009 0.473 6.3%
Historical 2/25/2009 0.473 6.3%
Historical 11/25/2008 0.445 8.5%
Historical 8/27/2008 0.445 8.5%
Historical 6/4/2008 0.445 8.5%
Historical 2/27/2008 0.445 8.5%
Historical 11/28/2007 0.410 9.3%
Click to enlarge

Source: Author estimates, Yahoo!Finance

The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo!Finance

The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created from data from Yahoo!Finance

The above chart shows that NEE has underperformed its dividend increases, suggesting that its future growth opportunities are declining or that the stock is possibly undervalued.

Dividend Discount Model Suggests A Slight Undervaluation

The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. NEE has a beta of 0.49 and with the risk free rate at a very low 2.1% this gives the discount rate to be a 5.6%. As noted above the forward dividend is approximately $2.29. Applying a long term growth rate of 2% gives an estimated price of $64.36 for NEE. This is approximately a 17% premium to the current price of $55.20. However, as with any dividend discount model, the result is highly sensitive to growth rate and equity hurdle rate assumptions.

DDM Sensitivities
Sensitivity Equity Hurdle Rate
Growth Rate 4.6% 5.6% 6.6% 7.6%
-2.0% 34.92 30.30 26.76 23.96
-1.0% 41.20 34.92 30.30 26.76
0.0% 50.24 41.20 34.92 30.30
1.0% 64.36 50.24 41.20 34.92
2.0% 89.52 64.36 50.24 41.20
3.0% 146.98 89.52 64.36 50.24
Click to enlarge

Source: Author calculations

NEE represents a way to gain exposure to renewable energy while maintaining an attractive dividend. While it might not have the highest dividend yield among utilities, NEE has shown good historical growth, certainly better than population growth that typically drives utilities. NEE will announce its third quarter earnings on Friday, November 4, 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.